Tata Consultancy Services (TCS) revenue growth in FY17 was the slowest since FY09 and for first time since its listing in 2005, both top line and bottom line growth were in single digits. This, analysts say, could have a big impact on the Tata group's growth plans, given that surplus cash has been helped the Tatas maintain their growth streak despite the poor profitability of the rest of the group since the 2009 Lehman crisis.
While on the previous occasion, the company experienced a V-shaped recovery, this time around analysts see a structural slowdown in the global IT sector, leading to sub-par growth for the company. "I don't foresee any immediate pick-up in the IT sector growth for at least two years. This would translate into single-digit growth for most Indian IT companies during the period," says G Chokkalingam, founder & CEO, Equinomics Research & Advisory. Earlier this month, Gartner cut worldwide IT spending growth in 2017 to 1.4 per cent from its earlier forecast of 2.7 per cent growth.
This would translate into lower growth for TCS, hurting the dividend income of its parent Tata Sons, the group holding company. Tata Sons owns 73 per cent stake in TCS, the highest among any listed group companies and dividend income from latter has been the prime source of revenue and profits for the holding company in the last decade. This cash in turns finds its way to various group companies -- listed and unlisted -- as incremental equity investment.
Tata Sons is estimated to have cumulatively earned nearly Rs 45,000 crore worth of equity dividend from TCS since its listing in 2005. Besides the holding company has raised capital in the past by either divesting its stake in the company or pledging a part of its TCS holding with lenders. Tata Sons owned 80.64 per cent stake in TCS post its listing in last quarter of 2004.
In the same period, Tata Sons made incremental equity investment of around Rs 46,500 crore in groups companies out of which around Rs 25,000 crore went to various listed companies. The figure includes preference shares and debentures. The equity support from the holding company allowed group company to investment in growth despite an operating environment in last few years.
"Explicit or implicit equity support from Tata Sons is a key source of financial strength for Tata group companies. This is especially true for companies such as Tata Steel, Tata Power and Tata Teleservices which are facing financial and economic headwinds for many year now," says Chokkalingam.
The group's listed companies (excluding Tata Consultancy Services) have cumulatively made around Rs 3 lakh crore worth of capex in the last decade nearly three times their cumulative retained earnings during the period. This translates into annual capex rate of around Rs 27,000 crore on average since FY05, against annual average retained earnings of around Rs 8,700 crore during the period. Companies funded the rest from incremental borrowings with equity support coming from Tata Sons.
The group combined (excluding TCS) debt-to-equity ratio (on gross basis) declined to 1.67 in FY16 from 1.94 in FY16 and record high of 2.4 in FY09. The net debt to equity ratio was down to 1.16 in FY16 from 1.38 in FY15 and record high of 2.0 in FY09. In comparison, group's gross debt doubled during the period from Rs 1,10,000 crore in FY09 to Rs 2,40,000 crore at the end of FY16 and group assets jumped from Rs 2,00,00 crore in FY09 to 4,35,000 crore in FY16.
Analysts say that the groups dependence on TCS would reduce if other large companies such as Tata Motors or Tata Steel show strong improvement in earnings going forward. Tata Steel is expected to report better numbers going forwards but it has to be seen how of dividend it can spare given its own capex requirements. Tata Motors is the second-most profitable firm in the group after TCS, but currently its implementing an ambitious capex plans both in its domestic business as well as JLR division.
There is no getting away from TCS in the short to medium term.